Portfolio valuation: Navigating complexity in the current climate
Accurately assessing the point-in-time value of investments and reporting on the development of portfolio value over time are central disciplines in the good governance of fund management. For fund managers, the robust valuation of investee companies is a pre-requisite, impacting stakeholders’ assessment of fund performance, influencing entry and exit decisions, and playing a crucial part in accurate financial reporting. The absence of procedures and controls around valuation can lead to misstatement of portfolio value, which in turn may have a detrimental impact on the decision-making processes of both investment managers and investors. Furthermore, stringent governance procedures are high on the list of qualities that investors demand, so a robust and credible valuation function is not only crucial to a fund meeting its regulatory, audit and governance expectations, but also to maintaining and attracting investment. The valuation of portfolio investments has come a long way since the early days of entry and exit prices with the development of fair value accounting standards, the emergence of guidance such as the International Private Equity and Venture Capital Valuation (IPEV) Guidelines, and regulatory intervention such as the Alternative Investment Fund Management Directive (AIFMD). Nonetheless, the valuation of alternative and illiquid investments remains challenging, highly subjective and a key focus area for auditors.
The depth of challenge, degree of subjectivity, and extent of audit scrutiny have all been exacerbated by the impact of the global pandemic and the extent of economic challenges that have followed. Global securities watchdog IOSCO recently warned that “the private capital sector is too complacent about possible risks, highlighting valuation as one of a number of areas where possible risks could emerge”, whilst the Financial Conduct Authority (FCA) is “preparing to launch a sweeping review of valuations in private markets amid growing fears over the impact of higher borrowing costs” *1 . Valuation in a volatile or recovery market is substantially more complex than valuation in a stable market and it is increasingly more critical that periodic reporting on the value of fund investments is fit for purpose, up-to-date and in line with best practice.
Valuing illiquid assets during a volatile market is significantly more complex than during a stable market as pricing metrics and benchmarks are highly
volatile and recovery pathways so varied. Jim Davies Corporate Finance
Jim Davies Partner Financial Advisory London +44 (0)7841 829 826 jim.davies@frpadvisory.com
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